Crude inventories surplus weighs on crude

Oil prices weakened following a risk-off trading session, a surprise draw with US stockpiles, and as the US braces for partial lockdowns that will damage an already vulnerable crude demand outlook.

Wall Street hit the sell button, dragging down commodities, as lockdown fears intensify and there are very little chances many Americans in need will see any fiscal support until after President-elect Biden takes office.

The EIA crude oil inventory delivered a surprise build and signaled economic activity is slowing down.  Oil prices tumbled after the headline read of a 4.3-million-barrel build, as the consensus estimate was a draw of 872,000 barrels.  Crude demand will suffer as many Americans will voluntarily restrict their movements.  Jet fuel demand has been improving and stockpiles have decreased for a sixth straight week, but that trend can’t last if lockdowns are imminent.

The IEA monthly oil report was rather depressing for the short-term, with another cut to the 2020 global oil demand and downbeat vaccine expectations to the demand outlook in the first half of 2021.

To the surprise of no one, OPEC+ hinted that oil output hikes may not occur for another three to six months.  It is getting ugly very fast and OPEC+ needs to be signaling they may deepen production cuts at the November 30th meeting.

WTI crude will continue to play tug-of-war here as the short-term price pressures are countered with strong optimism for a strong pickup in demand as the COVID-19 vaccines become readily available.

Gold gains ground

Gold prices rallied as safe-haven flows rushed in after Chicago advised residents to stay home, NYC prepared for school closures, France set a new hospitalization record, and the UK had its highest total of daily infections.  Gold pared some gains as the likelihood of a new stimulus package before President Trump’s term ends seems very unlikely since the White House is focusing solely on overturning the election outcome.  For a deal to happen, Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi need the situation to deteriorate further before either one can blink.

The ECB forum gave good reason to be optimistic of higher gold prices as the stimulus trade will only benefit from further support from the Fed, ECB and BOE over the next couple of quarters.  Fed Chair Powell reminded investors that the vaccine news is good for the medium-term, but that the next few months will be challenging.  The labor market recovery will struggle as the pandemic accelerated automation and large parts of the economy will change fundamentally.

Now that the vaccine news from earlier in the week has fully been priced in, gold prices should continue to consolidate with the next move likely being higher.  The USD1900 to USD1920 region will remain short-term resistance for gold, but should not pose much difficulty, as investors once again become fixated with the coronavirus impact across the US and Europe.

By Ed Moya